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Of all the data points released about the economy week after
week, perhaps the least helpful nowadays is the
Kauffman/LegalZoom Startup Confidence Index. With apologies in
advance to the Ewing Marion Kauffman Foundation and online
legal-advice company LegalZoom – both of which I have no doubt
carry the best intentions and otherwise do good work – and, with
an additional shout out to John Calvin, tracking startup
confidence seems an exercise in predestination.

You will never, ever find a time when startup confidence, as
measured by this survey, is not high. Ever. Startup owners are
confident, so confident that, well, they started a
company. One needn't waste human hours tallying numbers to
express that.

Let's take a deeper dive into the numbers themselves, released this
morning. Despite what the companies call “ceaseless
uncertainties in Washington” and “mixed signals” on the
economy, it turns out the confidence of owners of startups is
at a new high of 86 percent.

Put aside that the “new high” isn't all that significant since
the survey has only been tracking sentiment since the first
quarter of last year. There are other, more significant problems
with the survey and the results:

The life of the businesses surveyed is too
short. In ordered to be surveyed, you had to have
started a business within the past six months. This is the
biggest problem with the data compiled: You are talking to people
who felt optimistic enough about their own abilities to quit
their jobs and start a business. It puts to mind what Reed
Hastings said, that to be an entrepreneur “you have to feel like
you can jump out of an airplane because you're confident that
you'll catch a bird flying by.” Entrepreneurs may succeed or
fail, but confidence never flags.

It asks the wrong question. The lead
question is a simple one: “How confident are you that your
business will be more profitable in the next 12 months than it is
today?” Well, most businesses are not profitable in year one, let
alone in the first six months. So, since you are asking people
who are trying to turn losses into a viable business whether or
not they think they will be more profitable, isn't the answer
always “yes?” And, if not, does that matter? Many tech startups
have multi-year business plans that call for many quarters in the
red. That doesn't make them any less successful, particularly
since they probably have raised a war chest of cash to burn.

The survey tracks respondents by
age. According to the latest figures, 95 percent of
18-to-30-year-olds and 94 percent of 31-to-40-year-olds feel
certain about near-term profitability. That the youngest group
should feel more confident again shouldn't be a surprise, because
they lack long-term experience in being able to judge consumer
demand. There is some evidence that younger
entrepreneurs are less successful than older ones.

It is not a predictor of future startup
activity. One would think that entrepreneurial
confidence would lead to a higher rate of startup creation among
the younger demographic groups. In fact, it hasn't. Just look at
Kauffman's own Index of Entrepreneurial Activity, which
showed the share of startup activity by people between the
ages of 20 and 34 fell from 34.8 percent in 1996 to 26.2
percent in 2012. At the same time, the share of companies
started by people aged 55 to 64 rose from 14.3 percent to 23.4
percent. So, if confidence is higher among the younger
entrepreneurs, why is the growth rate for new business
creation so much higher among older entrepreneurs? Well, it is
because the population is aging. It has little to do with
changes in confidence.

It is reliant on LegalZoom's customers. This is
an email survey sent only to those people who used LegalZoom
products. LegalZoom has some fantastic tools for small
businesses, allowing owners to save money on the reams of
documents they need to file in starting or managing a business.
But, as businesses grow, and the stakes get higher, businesses
typically drop software for actual counsel (and curse incessantly
over the concomitant billable hours). As a result, you are asking
a very small subset of the overall entrepreneurial population –
both in absolute terms and size of business – for opinions.
Statistically and economically, that isn't a good enough sample
off which to make any bolder a declaration than “LegalZoom
customers agree...”

There is too much turnover in respondents. This
is a quarterly survey of people within six months of starting
their business. For those not good at math, that means that you
are asking a lot of different people the same questions.
Particularly when it comes to something as tough to measure as
confidence, it is more helpful to hear how respondents' thinking
evolves over time. Being a startup owner is great, but growing
that business into a multinational, big-money enterprise is even
better. That kind of experience is lost when you look at people's
sentiment at just the starting line.

So, is looking at confidence a waste of time? Not at all.
Consumer confidence is a nice way of judging potential sales.
Looking at the customer – rather than your peers – has a bigger
impact on business planning. And, even gauging sentiment among
business owners is helpful when you are asking a wider range of
questions to a bigger group of companies, as the National
Federation of Independent Business does with its Small Business Optimism Index.

For its part, Kauffman, in a statement, says the report “helps
illustrate the resilience of the American economy and the way in
which new business creation constantly creates a new economic
future, even as the surrounding economy appears stuck.”

Perhaps that is true. But it needs more than just a marketing
survey to prove the point.